Download Elasticity of Supply

Elasticity of Supply
• Changes in the price offered by
the market will affect the amount
of goods produced by businesses
• The degree to which a product’s
supply is impacted by price is
called the elasticity of supply
• If the price that consumers are
offering for a product goes upthe producers would be foolish
not to make more
• Big question is Can They Make
More? Ease of Production
• A factory makes tie dyed T shirts
• They respond to higher prices by
a massive increase in production
• The shirts are cheap and easy to
make
• They have an elastic supply
• On the other hand- let’s look at
the Boeing 777
• A third world dictator wishes to
pay double the sticker price to
build an airline for his country
• He is angered to learn that
Boeing turns down his offer to
buy twenty planes at $300 million
each- especially since they only
cost $150 million to begin with
• Remember ease of production?
Jets are not something you whip
up during an all nighter
• They are massive pieces of
intricate machinery and
technology
• No matter what you offer- Boeing
simply cannot make an
abundance of the planes
• Quantity cannot stretch mucheconomists refer to a product like
jets as having an inelastic
supply
• What are some other products
that are inelastic in supply?
Inelastic
• Powerplant/lines
• House
• Shopping malls
Supply Curves Move When Supply
Increases or Decreases
• Even if price remains constant-
other factors many force supply
to increase or decrease
• Businesses are often faced with
many obstacles in getting
products to the marketplace
• The factors are called
determinants of supply
• Technological improvement
• Resource prices
• Taxes and subsidies
• Competition
Technological Improvement
• If Ford buys new robots to work
in its factories, productivity will
increase
• More Fords will hit the
marketplace even if prices have
remained constant
Resource Prices
• The price of resources or factors
usually refers to anything needed
to make a product or provide a
service
• If a steel shortage causes
production problems at Caterpillarthe amount of tractors the
company will be able to make may
decrease
Taxes and subsidies
• Subsidy: monetary grant to a
business to help ease production
or develop a new product
• Taxes add to production costs
and will result in lower supplies at
a given price
• If more money is coming in the
form of subsidy, costs will
decrease and result in higher
supplies
Competition
• When in-line skates started to
become popular, there were only
a few companies in the field
• As the popularity became evident
to business people, more
producers entered the market
• Prices remained competitive, but
the supplies and choices of in line
skates swelled
• The product is Boeing 777s. For
each of the four determinants of
supply, think of a situation that
would increase the supply of
planes
Supply and Demand Meet!!
• The price system is the means by
which the price of a good or
service is determined in a pure
market economy
• When a business produces
something, it hopes to find a
customer, retrieve the money
spent in productions, and make a
profit
• When a business approaches the
marketplace- it posts a price that
says to customers “If you want
my product you will have to give
me this much”
• Customers also approach the
market with something to say
• If they choose to buy, they
confirm to the business that they
consider the price fair
• If they pass, the producer is
being told that the price is not
acceptable
• The business will respond by
lowering prices until people start
to buy
• Price is determined graphically
where the supply and demand
curves meet
• This point is often called
equilibrium
• It occurs when the supply for a
product matches the demand for
a product
• What is the current equilibrium
price of gasoline?